The Effect of Private Sector Credit on the Gross Domestic Product in Uganda (2010 – 2018)

Abstract

The real sector has strategic importance in an economy, but despite its importance and the rapid growth experienced in the financial sector in Uganda, the financial sector has not impacted positively on the real economy (GDP) as much as anticipated. This study investigates the effect of private sector credit on the economic growth proxy of gross domestic product in Uganda. It breaks down the effect into short run effect, long run effect and casual relationship between private sector credit and gross domestic product in Uganda between the period 2010 and 2018. The study used secondary data from the Bank of Uganda and Uganda Bureau of Statistics; GDP data, private sector credit data, lending rates and stock of deposits spread sheets. The data used is quarterly data covering the period from 2010 to 2018. The data was then analysed and presented using various tests and statistics such as descriptive statistics, correlation analysis, long run regression analysis, error correction model, ADF test, Jarque Bera test for normality, Engle Granger cointegration test and Granger Causality test. The results revealed a positive and significant relationship between gross domestic product and private sector credit in both the short run and the long run in Uganda. The results also reveal that both private sector credit and Gross domestic product have bi-directional causality in a short run. The study concluded that private sector credit has a significant relationship with gross domestic product and therefore the study recommended that the government should do more of long-term borrowing (treasury bonds) than short term (treasury bills). This will increase the amount of private sector credit available since treasury bills reduce private sector credit while treasury bonds do increase the amount of private sector credit. Key words; Gross domestic product and Private sector credit.